The Commoditization of Scale

In the game of innovation, there is next to no time to rest. As soon as you’ve discovered the next, best thing, everyone in your industry starts trying to replicate it. In the best cases, it takes your competitors years to distill your secret sauce. In the worst cases, it only takes months to move from profitable differentiation to commodity competition. Scale economics has been one of the last bastions from the competitive storm. In other words, the advantages of size gave some companies a bit of safe harbor.

Where most managers are forced to spend their days figuring out the next best iteration on their products or services, a handful of companies have been able to exploit scale instead of vision in their pursuit of profit. Utility companies are the traditional example. Once the lines are laid and houses are connected to the grid, it’s unlikely that power companies are going to see new entrants. Huge retailers such as Walmart and Target also use scale to keep their purchasing costs down and their prices competitive. Packaged food companies like Kraft and Pepsi use their scale to penetrate markets quickly and efficiently. All in all, scale has provided some immense strategic benefits to large companies around the world — protecting many from entrepreneurial innovations that would otherwise threaten. Unfortunately, the advantages accrued from scale are not destined to last.

You might be surprised that I am taking such a stance. After all, an economic understanding of the benefits of scale date back to 1776, when Adam Smith published The Wealth of Nations. To be fair, I am not arguing that the benefit of scale is going away. Instead, I am arguing that the benefits of scale are being commoditized. In today’s world, you don’t need to have scale to enjoy scale.

In the past three decades, managers have embraced off-shoring, outsourcing, and open innovation. Each of these practices modularizes a firm. Or, more simply, these processes make a very complex, integrated, value chain start to resemble much smaller, specialized, chains. Instead of relying on complex manufacturing and internal logistics infrastructures, managers realized specialization could yield increased efficiency. Despite this modularization, managers still relied on one support system to unify a set of seemingly smaller value chains; information. By building complex IT systems and integrating with supply and distribution partners, only the largest firms in the world could wield both the benefits of scale and specialization.

Such information collection and distribution required massive scale and drove competitive advantage. It was no small task for a corporation to get information from the point of sale to internal procurement teams to a diverse manufacturing network. The corporations with the resources to coordinate these efforts enjoyed the benefits.

But the technologies that drove these coordination-related scale advantages are becoming increasingly cheaper and more pervasive. Where producing a product in a Chinese plastic extrusion plant used to require people on the ground brokering deals, proprietary information systems, and the ability to guarantee substantial volume, today it requires only Alibaba.com. Where only the largest organizations could operate 24-hour call centers, today, even small organizations have access to companies like Global Response. And cloud services are making it possible for even the smallest organizations to have access to first class customer management systems, fulfillment software, and accounting programs. Today, even the scale advantages from procurement are under attack.

Where stable profits reside, entrepreneurs will converge. Previously, it was the expense and complexity of information systems that preserved the profitability of scale. These factors disabled businesses from emerging to allow small businesses to band together to achieve scale purchasing, scale manufacturing, and more. However, with the availability of cheaper more accessible information technologies, that’s all changing. The competitive advantages of scale are being commoditized. Minimum efficient scale is getting smaller and smaller.

So what’s the solution? Accept that everything becomes commoditized. Develop a strategy that doesn’t simply rely on being the biggest. Develop a strategy — a difficult to replicate, cogent set of practices in an industry — that assumes everyone will have the advantages of being the biggest. Get to know your customers. Develop a vision of the future. Build things that people want. Realize that everyone will have access to scale.

If you frequent the HBR Blogs, you may have noticed that a couple of weeks ago I was fairly vocal about Nilofer Merchant‘s dismissal of Porter’s value chain. I disagreed with her suggestion that Porter’s concept was no longer relevant in what she’s dubbed the social era. Instead, I think that understanding the model actually gives us insight into why Nilofer’s social strategy is increasingly valuable (a point I do agree with). Sustainable differentiation, the key to competitive advantage in Porter’s mind, can no longer be achieved through scale. Though I agree with Nilofer’s (and others’) point that fast, fluid, business models can create competitive advantage, I disagree that the new competitive advantage has to be social; it can be achieved through proprietary IP, developing unique distribution channels, creating innovative service models, and more.

The point of this article is not to explain how to adapt to the commoditization of scale — if that’s what you’re looking for turn here or here — the point is to explain why the theories of the past can help us predict that scale simply won’t be enough.

Adapting to the commoditization of scale is not going to be easy. Adapting to change never is. But one thing is certain: it’s going to be necessary.

Partner Center

The email and password entered aren’t matching to our records. Please try again, or reset your password. If you have a username from our previous site, start by using that. Please See our FAQ for more.

If you are signing in for the first time on the new HBR.org but have an existing account, please enter your existing user name and password to migrate your account.Please see Frequently Asked Questions for more information.